An­other No­bel sur­prise for eco­nom­ics

The Myanmar Times - - Front Page - ROBERT J. SHILLER news­room@mm­times.com

THE win­ner of this year’s No­bel Me­mo­rial Prize in Eco­nomic Sciences, Richard Thaler of the Uni­ver­sity of Chicago, is a con­tro­ver­sial choice. Thaler is known for his life­long pur­suit of be­havioural eco­nom­ics, which is the study of eco­nom­ics from a psy­cho­log­i­cal per­spec­tive. For some in the pro­fes­sion, the idea that psy­cho­log­i­cal re­search should even be part of eco­nom­ics has gen­er­ated hos­til­ity for years.

Not from me. I find it won­der­ful that the No­bel Foun­da­tion chose Thaler. The eco­nom­ics No­bel has al­ready been awarded to a num­ber of peo­ple who can be clas­si­fied as be­havioural economists, in­clud­ing Ge­orge Ak­erlof, Robert Fo­gel, Daniel Kah­ne­man, Eli­nor Ostrom, and me. With the ad­di­tion of Thaler, we now ac­count for ap­prox­i­mately 6 per­cent of all No­bel eco­nom­ics prizes awarded.

But many in eco­nom­ics and fi­nance still be­lieve that it is best to es­chew psy­chol­ogy and de­scribe hu­man be­hav­iour as math­e­mat­i­cal op­ti­mi­sa­tion by sep­a­rate and re­lent­lessly self­ish in­di­vid­u­als, sub­ject to bud­get con­straints. Of course, not all economists, or even a ma­jor­ity, are wed­ded to this view, as ev­i­denced by the fact that both Thaler and I have been elected pres­i­dent, in suc­ces­sive years, of the Amer­i­can Eco­nomic As­so­ci­a­tion, the main pro­fes­sional body for economists in the United States. But many of our col­leagues un­ques­tion­ably are.

Re­search sparks an­i­mos­ity I first met Thaler in 1982, when he was a pro­fes­sor at Cor­nell Uni­ver­sity. I was vis­it­ing Cor­nell briefly, and he and I took a long walk across the cam­pus to­gether, dis­cov­er­ing along the way that we had sim­i­lar ideas and re­search goals. For 25 years, start­ing in 1991, he and I co-or­gan­ised a se­ries of aca­demic con­fer­ences on be­havioural eco­nom­ics, un­der the aus­pices of the US Na­tional Bu­reau of Eco­nomic Re­search.

Over all those years, how­ever, there has been an­tag­o­nism – and even what ap­peared to be real an­i­mus – to­ward our re­search agenda. Thaler once told me that Mer­ton Miller, who won the eco­nom­ics No­bel in 1990 (he died in 2000), would not even make eye con­tact when pass­ing him in the hall­way at the Uni­ver­sity of Chicago.

Miller ex­plained his rea­son­ing (if not his be­hav­iour) in a widely cited 1986 ar­ti­cle called “Be­hav­ioral Ra­tio­nal­ity in Fi­nance.” Miller con­ceded that some­times peo­ple are vic­tims of psy­chol­ogy, but he in­sisted that sto­ries about such mis­takes are “al­most to­tally ir­rel­e­vant” to fi­nance. The con­clud­ing sen­tence of his re­view is widely quoted by his ad­mir­ers: “That we ab­stract from all these sto­ries in build­ing our mod­els is not be­cause the sto­ries are un­in­ter­est­ing but be­cause they may be too in­ter­est­ing and thereby dis­tract us from the per­va­sive mar­ket forces that should be our prin­ci­pal con­cern.”

No money ly­ing around Stephen A. Ross of MIT, an­other fi­nance the­o­rist who was a likely fu­ture No­bel lau­re­ate un­til he died un­ex­pect­edly in March, ar­gued along sim­i­lar lines. In his 2005 book Neo­clas­si­cal Fi­nance, he, too, es­chewed psy­chol­ogy, pre­fer­ring to build a “method­ol­ogy of fi­nance as the im­pli­ca­tion of the ab­sence of ar­bi­trage.” In other words, we can learn a lot about peo­ple’s be­hav­iour just from the ob­ser­va­tion that there are no US$10 bills (K13,600) ly­ing around on public side­walks. How­ever psy­cho­log­i­cally bent some peo­ple are, one can bet that they will pick up the money as soon as they spot it.

Both Miller and Ross made won­der­ful con­tri­bu­tions to fi­nan­cial the­ory. But their re­sults are not the only de­scrip­tions of eco­nomic and fi­nan­cial forces that should in­ter­est us, and Thaler has been a ma­jor con­trib­u­tor to a be­havioural re­search pro­gramme that has demon­strated this.

For ex­am­ple, in 1981, Thaler and Santa Clara Uni­ver­sity’s Hersh She­frin ad­vanced an “eco­nomic the­ory of self-con­trol” that de­scribes eco­nomic phe­nom­ena in terms of peo­ple’s in­abil­ity to con­trol their im­pulses. Sure, peo­ple have no trou­ble mo­ti­vat­ing them­selves to pick up a $10 bill that they might find on a side­walk. There is no self-con­trol is­sue there. But they will have trou­ble re­sist­ing the im­pulse to spend it. As a re­sult, most peo­ple save too lit­tle for their re­tire­ment years.

Economists need to know about such mis­takes that peo­ple re­peat­edly make. Dur­ing a long sub­se­quent ca­reer, in­volv­ing work with UCLA’s Shlomo Be­nartzi and oth­ers, Thaler has pro­posed mech­a­nisms that will, as he and Har­vard Law School’s Cass Sun­stein put it in their book Nudge, change the “choice ar­chi­tec­ture” of these de­ci­sions. The same peo­ple, with the same self-con­trol prob­lems, could be en­abled to make bet­ter de­ci­sions.

Im­prov­ing peo­ple’s sav­ing be­hav­iour is not a small or in­signif­i­cant mat­ter. To some ex­tent, it is a mat­ter of life or death, and, more per­va­sively, it de­ter­mines whether we achieve ful­fill­ment and sat­is­fac­tion in life.

Thaler has shown in his re­search how to fo­cus eco­nomic in­quiry more de­ci­sively on real and im­por­tant prob­lems. His re­search pro­gramme has been both com­pas­sion­ate and grounded, and he has es­tab­lished a re­search tra­jec­tory for young schol­ars and so­cial engi­neers that marks the be­gin­ning of a real and en­dur­ing sci­en­tific rev­o­lu­tion. I couldn’t be more pleased for him – or for the pro­fes­sion. – Pro­ject Syn­di­cate

Robert J. Shiller, a 2013 No­bel lau­re­ate in eco­nom­ics, is pro­fes­sor of eco­nom­ics at Yale Uni­ver­sity and co-cre­ator of the Case-Shiller in­dex of US house prices.

While peo­ple have no trou­ble pick­ing up a $10 bill they find on the side­walk, they will have trou­ble re­sist­ing the urge to spend it.

Photo: EPA

Richard H. Thaler, pro­fes­sor of be­havioural sci­ence and eco­nom­ics at the Uni­ver­sity of Chicago, an­swers ques­tions at a news con­fer­ence after win­ning the 2017 No­bel Me­mo­rial Prize in Eco­nomic Sciences, at the uni­ver­sity in Chicago, Illi­nois, on Mon­day.

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